A Heterodox History of Money

Once upon a time, people would barter goods. This was inconvenient, so we invented money — at least, that is what Adam Smith tells us. Anthropologist David Graeber disagrees, and argues that primitive economies operated on credit, while money was first created by states. What would that mean for cryptocurrencies such as Bitcoin? Written by: Riley Badenbroek

David Graeber, professor of anthropology at the London School of Economics, passed away last year. One of his most prominent works was a history of debt [3], which among other things criticizes what he called ‘the myth of barter,’ the conventional history of money. As a sort of in memoriam, I will attempt to elaborate on his arguments below, and also speculate what this might mean for modern-day cryptocurrencies.

The myth of barter
Graeber traces the myth of barter back to Adam Smith, the founder of economics. In The Wealth of Nations [8], Smith writes that

When the division of labour has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.

In other words, if a baker would like to eat something other than bread, he will go to the butcher and try to exchange some bread for a piece of meat.
The baker and the butcher will then engage in barter, but that can be tricky:

The butcher has more meat in his shop than he himself can consume, and the brewer and the baker would each of them be willing to purchase a part of it. But they have nothing to offer in exchange, except the different productions of their respective trades, and the butcher is already provided with all the bread and beer which he has immediate occasion for. No exchange can, in this case, be made between them. He cannot be their merchant, nor they his customers; and they are all of them thus mutually less serviceable to one another. In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

Such commodities, Smith argues, are early versions of what we now call money. They include salt, shells, and tobacco, but these seem to have given way to precious metals. Metals do not perish and can be divided in smaller units without any loss, making them ideal foundations for currency. Still, there are some problems: different pieces of gold or silver will have different weights, and therefore different values. This means that one would have to weigh these metals whenever a transaction is made. Moreover, one can mix a precious metal with substances of lesser value without changing their appearance.

To prevent such abuses, to facilitate exchanges, and thereby to encourage all sorts of industry and commerce, it has been found necessary, in all countries that have made any considerable advances towards improvement, to affix a public stamp upon certain quantities of such particular metals, as were in those countries commonly made use of to purchase goods.

By stamping pieces of metal, the state affirms the weight and content of pieces of metal. Hence, coins were created.

This story probably sounds familiar — it is engraved in our common sense, and many economics textbooks repeat some version of it. However, to quote Graeber [3], “the problem is there’s no evidence that it ever happened, and an enormous amount of evidence suggesting it did not.”

Credit instead of barter
Let’s go back to the beginning of Smith’s story. The butcher has some meat left over which the baker wants, but the butcher does not need any more bread. There are some solutions that Smith did not consider: one option would have the butcher just hand over some meat, without getting anything in return. This is not as far-fetched as it may seem. For instance, in his Book of the Eskimos, Peter Freuchen [2] writes:

Every single walrus we got gave gains to everyone in the party. Big heaps of meat became my property, and with tears in my eyes I would thank the hunter who first had thrust his harpoon in the animal. They laughed uproariously at that, but even the best joke can be repeated too often, and old Sorqaq — who had been a great angakok and chief hunter in his day — took it upon himself to put me straight:

"You must not thank for your meat; it is your right to get parts. In this country, nobody wishes to be dependent upon others. Therefore, there is nobody who gives or gets gifts, for thereby you become dependent. With gifts you make slaves just as with whips you make dogs!"

This last line is significant, because it shows that the Inuit do not view the sharing of food as a favor. It is not a gift, no optional gesture you should be grateful for. Sharing is fundamental to their culture.

But let’s say that our butcher is not generously sharing the meat he does not need. Still, there is a solution other than barter. The butcher can say to the baker: “Alright, here you go, have some meat. But you owe me.” If the butcher and the baker live in the same village, there will likely come some time when the baker has something the butcher needs, and they could settle the score. The butcher thus extends a credit to the baker.

Such credits can be used to cancel debts with third parties as well. Graeber writes the following about sixteenth- and seventeenth-century England, based on research by Craig Muldrew:

In eighteenth-century New Zealand, English settlers soon learned that it was not a good idea to admire, say, a particularly beautiful jade pendant worn around the neck of a Maori warrior; the latter would inevitably insist on giving it, not take no for an answer, and then, after a discreet interval, return to praise the settler’s coat or gun. The only way to head this off was to quickly give him a gift before he could ask for one. Sometimes gifts are offered in order for the giver to be able to make such a demand: if one accepts the present, one is tacitly agreeing to allow the giver to claim whatever he deems equivalent. [p. 108]
Elsewhere, those frequenting the local butcher, baker, or shoemaker would simply put things on the tab. The same was true of those attending weekly markets, or selling neighbors milk or cheese or candle-wax. (…)
Since everyone was involved in selling something, however, just about everyone was both creditor and debtor; most family income took the form of promises from other families; everyone knew and kept count of what their neighbors owed one another; and every six months or year or so, communities would held a general public “reckoning,” cancelling debts out against each other in a great circle, with only those differences then remaining when all was done being settled by use of coin or goods. [p. 327]

Graeber is hardly the first anthropologist to argue that neighbors would have little reason to engage in barter. For example, Humphrey [5] writes that “no example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing.”

This does not mean barter never occurred. Credit systems require people to engage in relationships, to trust each other to one day repay the debt. This becomes hard, if not impossible to do with strangers or enemies. It is then, Graeber argues, that people may actually engage in barter. (One other reason people would barter goods is that they are used to money, but lose access to it. In some prisons, for example, inmates use cigarettes as currency.)

The uses of social currencies
If basic exchange can go on just fine with these credit systems and the occasional barter with outsiders, what are the examples of money that Smith mentioned actually used for? Graeber argues that

what used to be called “primitive money” — that is, the sort one encounters in places where there are no states or markets — whether Iroquois wampum, African cloth money, or Solomon Island feather money, (…) is used almost exclusively for the kinds of transactions that economists don’t like to have to talk about.

In fact, the term ``primitive money'' is deceptive for this very reason, since it suggests that we are dealing with a crude version of the kind of currencies we use today. But this is precisely what we don't find. Often, such currencies are never used to buy and sell anything at all. Instead, they are used to create, maintain, and otherwise reorganize relations between people: to arrange marriages, establish the paternity of children, head off feuds, console mourners at funerals, seek forgiveness in the case of crimes, negotiate treaties, acquire followers -- almost anything but trade in yams, shovels, pigs, or jewelry.

Marriages form a good example. In some cultures, it is common for a man to present ‘bridewealth’ to a woman’s family when proposing:

A suitor’s family would deliver a certain number of dog teeth, or cowries, or brass rings, or whatever is the local social currency, to a woman’s family, and they would present their daughter as his bride. It’s easy to see why this might be interpreted as buying a woman, and many colonial officials in Africa and Oceania in the early part of the twentieth century did indeed come to that conclusion.

Rospabé [7] however argues that such currency is actually an expression of a debt that cannot be repaid by any other means. No one would ever think that a whale’s tooth is equally valuable as a woman. Women are not only human beings, but they are even able to create new humans. Hence, the only thing that could possibly be as valuable as a woman would be another woman. Until the man’s family could ‘return’ a woman to the bride’s family, they are in their debt. The money is a reminder of this unsettled score, a substitute for life.

In a way, these social currencies are almost unnecessary. Both parties engage in a relationship, so as long as everyone recognizes the outstanding debt, there is no need for whatever commodity to actually change hands. This is fundamentally different from how most of us use money: I do not start a lasting relationship with the cashier at my local supermarket, they really want my money. So where does money in the modern sense comes from?

The emergence of physical money
To answer this question, Graeber points us towards the state:

Say a king wishes to support a standing army of fifty thousand men. Under ancient or medieval conditions, feeding such a force was an enormous problem — unless they were on the march, one would need to employ almost as many men and animals just to locate, acquire, and transport the necessary provisions. On the other hand, if one simply hands out coins to the soldiers and then demands that every family in the kingdom was obliged to pay one of those coins back to you, one would, in one blow, turn one’s entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with things they want. Markets are brought into existence as a side effect.

As Graeber remarks elsewhere, “a heavily armed itinerant soldier is the very definition of a poor credit risk.” No butcher would hand a piece of meat to a soldier and expect to be repaid the next time they meet: the soldier might die, not come by the butcher’s village again, or just refuse to return the favor (remember that soldiers have weapons). To overcome this trust issue, the king imposes a tax on the village. Every villager has to pay the king a certain number of coins stamped with the king’s face, or else you can expect an unpleasant visit from the army. The threat of violence has everyone scrambling to get their hands on some of those coins, which the king has distributed among his loyal soldiers. And thus all the villagers try to serve the state in some way.

This theory of money is called chartalist: money is just a token (charta in Latin) that has little to no intrinsic value. Its actual value derives from the fact that someone — a state or some other party, such as a bank — is willing to cancel a debt when you hand in such a token. This does not only apply to coins, but to banknotes and bank accounts as well: they too are ultimately symbols of outstanding debt. None other than John Maynard Keynes [6] was a proponent of this theory, and it lead him to declare that “to-day all civilised money is, beyond the possibility of dispute, chartalist.”

Token money is most useful when the credit-based relationships we talked about before are hard to establish. This is particularly true in unruly times and places.
Graeber notes that the ancient civilizations of Mesopotamia, Egypt, and China were relatively peaceful and operated largely on virtual credit money. Eurasia seems to have become a more violent place between 800 BC and 600 AD, and coinage dominated in this period. The Middle Ages started with the collapse of empires around the world, ushering in a time of relative social peace. Some have argued that the world reverted to barter in this period, but closer inspection reveals the type of credit economies we discussed before. European colonialism marked the return of an era of bullion, which can be said to have ended fifty years ago: in 1971, Richard Nixon announced the US dollar would no longer be tied to gold. With this move, the dollar and the world’s other currencies became fiat money.

This brings us to the modern day, where the question of what money is has sparked a lively debate. New currencies such as Bitcoin have been proposed, and we have yet to see whether they will ever be as popular as ‘regular’ money. Graeber’s book [3] does not cover these topics, but he has shared his opinion on Bitcoin on Twitter [4]:

I have avoided going into it other than to say I think bitcoin is based on a false popular understanding of what money is & how it originated. It’s more a speculative commodity than a viable currency.

Someone believing Adam Smith’s theory might argue that modern fiat money, now that it is no longer redeemable for gold, has no intrinsic value. It only gets to be valuable because we all agree that it does, and the same could be true for Bitcoin. Not quite, says Graeber. Our fiat money is valuable because you have to pay your taxes in that currency, and if you do not pay your taxes, the state has the right to use violence against you. Of course, the violence propping up our government is somewhat hidden. Most Western governments will maintain that demanding taxes is a lot more legitimate than simple extortion. The services our governments provide are sufficient reason for most of us to, perhaps begrudgingly, pay our taxes. Still, if I keep my foot down and refuse to pay, the state will eventually use some force against me. This threat is a convincing argument to get my hands on at least some euros, dollars, or pounds. On the other hand, there has never been a pressing need for me to gather Bitcoins.

Let me ask a pretty facetious question: why do we not use my tears as an alternative currency? It shares some characteristics with Bitcoin: the total amount cannot increase too quickly (I can only cry so much every day) and it will at some point reach an upper bound (I will die one day, and this will stop me from crying). My tears can be split into smaller quantities (bring your own vial), and can be stored long-term without much loss (close your vial tightly). Let’s also, for the sake of argument, assume that anyone can determine if tear fluid is truly mine or some imposter’s. This tear currency even has an advantage over Bitcoin: it consumes significantly less electricity than all of Argentina [1].

Of course, the cashiers at my local supermarket will not accept a vial of my tears as payment. They have no reason to own it: it does not allow them to pay their taxes or to buy other commodities. The fact that my tears are rare does not automatically make them valuable. The story might be different if everyone truly believed that my tears have some value, because everyone else believed that as well.

But similarly, Dutch tulip bulbs could also have been a viable seventeenth-century currency, if only everyone kept faith in their extraordinary value.
The price of tulip bulbs shot up dramatically in late 1636, and came crashing down again in early 1637. It seems fair to argue that this rise was merely due to speculation, not a reflection of changes in the inherent value of tulips. In the end, tulips are just tulips. They are valuable because they brighten up your house — there is no reason they should be worth more than your house. The same goes for vials containing my tears: their intrinsic value is pretty limited. You do not actually need them, no one does. Tulips and tears would make poor currencies.

If we believe Graeber’s version of history, it would be a novelty if ‘currencies’ based purely on faith — Bitcoins, tulips, tears — would rival the debt-based dollars and euros of this world. Perhaps one day Bitcoin will be a stable currency, a digital piggy bank. But it is also possible that Bitcoin will go the way of the tulip, and it will end in tears.

1] Cristina Criddle. Bitcoin consumes ‘more electricity than Ar-gentina’. https://www.bbc.com/news/technology-56012952,2021. Accessed: February 12, 2021.[2] Peter Freuchen. Book of the Eskimos. World Publishing Com-pany, 1961.
[3] David Graeber.Debt: The first five thousand years. MelvilleHouse, 2011.
[4] David Graeber.https://twitter.com/davidgraeber/ sta-tus/990857460176089088, 2018. Accessed: February 12, 2021.
[5] Caroline Humphrey. Barter and economic disintegration. Man ,pages 48–72, 1985.[6] John Maynard Keynes. A Treatise on Money. MacMillan,London, 1930.
[7] Philippe Rospabé. La dette de vie: Aux origines de la monnaie. La découverte, 2010.
[8] Adam Smith. An Inquiry into the Nature and Causes of theWealth of Nations. W. Strahan and T. Cadell, London, 1776.

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